jonathan: from new york city for our viewers worldwide, i'm jonathan ferro. "bloomberg real yield" starts right now. ♪ coming up, a fractured fed delivers another rate cut as trade talks between the u.s. and china resume. a little optimism driving junk-bond toward a fifth straight week of gains. yield hit 20-month lows. and the new york fed rolling out an old tool, funding markets signing some stability. we begin with the big issue.

a fractured fed meets a wall of skepticism. >> there is a lot of dissension in the ranks. a division 7-3. >> i am surprised bullard went as far as to dissent. >> there is a little bit of a split in the dots. >> there are honest differences of opinion in how vulnerable the u.s. economy is. >> on one hand, certain parts of growth, especially domestically, that are holding up. >> you can make the argument that the fed should not do anything. >> on the other hand, you have the trade war, geopolitical risks. >> manufacturing is slowing down.

>> capex spending lower. >> you will find more and more divisions in the committee. >> they want to see more cuts by the fed. jonathan: joining me here in new york city, priya misra of td securities. diana amoa of jpmorgan, and krishna memani. of invesco. let's begin with you, priya. your thoughts on the potential of another rate cut before year's end? priya: we are looking for

another rate cut in october. we have been looking for 75 basis cuts this year. the fed is putting in some insurance cuts. our view is the consumer will show signs of stress, so we see the fed cutting three more times next year. i did not read the fed as being that hawkish. i think, relative to where they were in july -- in july, chair powell said midcycle adjustment. we are cutting down but we may take it back. i think that was a communication mistake. he is facing a divided committee. what i heard this week is we don't know, we are still in the process of running this midcycle adjustment -- and notice he didn't use the word midcycle adjustment.

but he has gotten more of the committee into this insurance camp. i am looking at the seven dots that has one more cut penciled in. so i think the fed is trying to retain optionality. i think chair powell and vice chair clarida today essentially said meeting by meeting, but one more cut as part of this midcycle adjustment insurance preemptive risk management -- these are all the terms to be -- to say that look, the data is not bad but the downside risks are high enough. i think they are trying to be noncommittal rather than hawkish.

jonathan: the chairman, i think, did a fantastic job. really good communication effort, when it is complex and difficult to find a central view of a divided fed. the problem, diana, is that communication effort was hijacked by the dot plot. how much did you read into the dot plot and the dispersion among policymakers? diana: first of all, the dot plots are an assessment of where the policymakers think the policy should be, given the economic framework. it is not a projection of the direction of rates. the chairman did a good job of giving himself enough leeway and enough wiggle room that, if things deteriorate, they will be able to act. this over focus on the dots removes the fact that he has

opened up the door, similar to what mario draghi did. if things deteriorate, we will be ready to act. we expect to see more slowdowns to come through from china and the rest of the world. this is clearly a fed that is central bank to the world, and as that starts to impact financial conditions outside, i believe they will be forced to cut again, once, maybe twice, again this year. jonathan: the other problem is that every dot is a policy maker. some of those policymakers have that every dot is a policy a vote. some of those policymakers are more important than others. krishna: the one thing i have learned about the dot plots over

the last two years is to ignore them. because they don't tell you anything. we have done things where the dot plots have said one thing and we have done something totally different later on. i think i think the dot plots is something that has to be put in the dustbin of history. it was valuable at one point. it is meaningless today. having said that, what the dot plot is telling you is there is dissension. in this era, when the fed tightened policy in 2018 come almost a policy mistake, and now they are unwinding, that dissension is to be expected. at least it is not as bad as the

ecb, where you don't even have to take a vote that is the way they dodged that issue. dissension is to be expected, but there is enough of a majority within the committee for us to have another few more rate cuts before this easing cycle is over. jonathan: several transmission mechanisms of policy to reach the real economy. one is communication. the transmission mechanism should have the confidence of putting out your communication and reaching the end consumer, market or discipline, whoever. i just wonder whether the dissent is complicating that effort. to what degree is that true?

krishna: it certainly is true. however, i think powell did a masterful job in the press conference. i think that midcycle adjustment was all about highlighting that dissension. dodging the issue altogether, keeping the fed's optionality, shows the maturation that he is going through. now he is talking interns as well. fantastic. we need a fed like that rather than putting everything out on the table. because things are uncertain. having that flexibility is important.

jonathan: there is an argument among many people that this was not enough. 25 basis points was not enough. they should have gone harder. they should have been emphasizing through the future that more rate cuts are coming. when you look at the yield curve, 2/10, it didn't steepen. it flattened. what is the argument? that they are not doing enough quickly enough, or is it just people questioning monetary policy? every rate cut they deliver, you push that through the curve and drag the whole curve lower. priya: i think it is the latter. we realize this is not an interest rate problem.

chair powell said that in the july press conference, which i struggled with. you have the fed chair saying this is not an interest rate problem, and how am i solving this? by cutting interest rates. so i think even if they had gone 50, the curve would have flattened. the market would have said what do they know that we do not know? why are they doing this? they are a little bit stuck here. all they can say is clarified the reaction function. if the economy weakens more, we are ready to do more, ready to

do what it takes, ready to go to zero asset purchases. as yields fall to fresh 20 month lows. that conversation is coming up next. this is "bloomberg real yield." ♪

jonathan: i'm jonathan ferro. this is "bloomberg real yield." we want to go to the auction block in europe where weekly sales are breaking 50 billion euros for only the fourth time in 2019. here in the u.s., the high-grade corporate market posting a healthy $20 billion in sales. that from paypal and walmart. issuance in junk debt slowed after the busiest week in more than two years. elsewhere, the majority of loans still being broadly well-received. sticking with a high-yield credit market, some strong

words, seeing many signs of froth. >> the most recent sign, in addition to the pick up in issuance, that is one thing. but when you see these deals, that sort of starts to make the hair on the back of my neck stand up a touch. and we also see things like the spread between bb's or b's and ccc's widening. one of the reason you see that late cycle is credit deteriorates, the weaker companies suffer weaker credit deterioration before some of the higher rated companies. jonathan: around the table with me is priya misra, diana amoa, and krishna memani. your view on this, and let's talk about yields. spreads are tightening, almost at the tightest of the year. 20 month lows, just looking at yields. your thoughts on where we are at the moment? krishna: so the argument for

high-yield being expensive is very easy to make. overall, yield levels are low, spread levels are tight. high-yield is not cheap by any measure. however, for income, there are very few choices that most investors have. if you look at the flows, they are speaking with their dollars. they are putting money in investment grade market, fixed income, rather than equities, because they think it is better value. the key point with respect to valuations is you use valuations to arrive at how much risk you want to take rather than what risk you want to take. if you go back and look at

history, if you what by valuation to make judgments about any market, that has gotten to a wrong answer far more than a right answer. jonathan: what do you say? priya: i would say this is an environment of hedging. because i am concerned about the economy. i don't know if i would be in high-yield. i am not a credit analyst, but i would say this is a time to do active management. maybe you should look at the credit more than just pile on to any high-yield. also liquidity. i will keep highlighting that i think credit market liquidity is not what it was many years ago. i would argue owning treasuries as a hedge. that will give you protection against any weakness in the economic data, or any liquidity event, like fourth-quarter losses. jonathan: just make sure this follows, your choices always as follows to get that income, take more ration risk, or sacrifice liquidity. what is the precedent for you, diana?

diana: given what we have seen in various pockets of the market, liquidity has to be a big consideration. we are of the similar view that we are in the late cycle of the economic expansion. with that in mind, you don't want to the piling into high-yield. our strategy is up in quality, going into quality government duration, rather than buying high-yield at these levels. jonathan: where does e.m. fall

into the calculus? diana: within high-yield, on the one hand, you have governments cutting rates. you have to be selective. you have better quality names where the policies to actually be supportive, which would support some select local markets. we have seen a pretty strong duration rally in e.m. local as central banks have been cutting. within sovereign space and credit, there is value to be had in going up, although spreads

are closer to what you see elsewhere. but there is some value going up the credit just because of that income space. jonathan: the long dated credit has had a massive year through 2019. in fact, there is an index we have here which basically captures some of the long dated names within corporate credit. gains north of 20% so far in 2019. is there any incentive to go further out along the curve for these corporate names? is it steep enough to have that incentive there to say i will take the longer dated corporate paper? krishna: i don't think so. jonathan: you guys will be sticking with me. coming up on the program, the week ahead featuring a slew of economic data and another big week of fed speak. this is "bloomberg real yield." ♪

jonathan: i'm jonathan ferro. this is "bloomberg real yield." time for the final spread. on monday, we get u.s. and eurozone pmi's for the month of september. fed members speaking throughout the week. williams, evans, kaplan. tuesday, u.s. consumer confidence numbers and german epfo data. finally on friday, u.s. personal income and spending numbers. with me around the table still is priya misra, diana amoa, and krishna memani. priya, i want to sing your praises, because you have been talking about this for the best part of 12 months. the issues that we see this week

in the repo market, and you are not putting it down to corporate pulling money from market money funds with a load of treasure insurance, you have been talking about this for a while. it comes down to reserves. walk me through the dynamic. why is it so important? and it is a problem that needs addressing now. priya: sure. it's a question of reserve scarcity in aggregate, but it is really the distribution of reserves. the number of excess reserves in the system is about 1.3 trillion. the fed has been saying perhaps 900 billion to one trillion is enough. so therefore we are in an excess reserve regime, and therefore,

they can let reserves fall. and reserves have been falling for quite some time. most of it was because the fed was leading the portfolio runoff. but even if they stop that, it will continue to fall because currency in circulation continues to grow. my argument is because of the regulatory environment, which has changed in the last five, seven years, even though the total amount of reserves are ok, the interbank trading of reserves is not happening. so there is a massive difference between the haves and have-nots when it comes to bank reserves. it is the weakest bank in bank reserves that will put this pressure on the repo market. i would argue that any time you get any small dislocation around supply demand for reserves, you will get these outside spikes in repo. we saw this in december, year end, in april around the tax date. we are seeing it again. i think the fed, though, has reacted much faster than people expected. i am very pleased that they have addressed the quarter end issue already.

every day, my blood pressure would rise between 2:00 and 4:00, because you would have to see if the fed would do another overnight operation. they have said today they will be doing an overnight operation, they are doing a term operation. so the fed is doing it on a day to day basis. i really hope they address the structural issue, which we think they will. in october, we think they will come in and start buying assets. it is like qe, but it is what they need to do to prevent reserves from declining. what it means for the market as they will come in and buy treasuries. i think they will need to buy more -- jonathan: t-bills or throughout the whole curve? priya: across the curve. they are buying across the curve are now, so why muddy the waters? make that $45 billion a month. jonathan: great to catch up with all of you. diana amoa, priya misra, and krishna memani. that does it for all of us in new york city. this was "bloomberg real yield." this is bloomberg tv. ♪

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